Obama Plan Could Mean Huge FDIC Premiums

WASHINGTON — The Obama administration proposed Monday to raise the required level of reserves at the Federal Deposit Insurance Corp. to more than $80 billion — a move that would require banks to pony up a huge amount of money.

In its proposed 2011 budget, the White House, citing the insolvency of the Deposit Insurance Fund, said that allowing the ratio of reserves to insured deposits to fluctuate in a range of 1.15% to 1.5% has proven "inadequate to handle the unexpected risks and losses that come with a downturn in the economy."

Lawmakers should consider "a level above 1.5% in order to maintain positive fund balances during future downturns," the budget said.

The proposal appeared to be a trial balloon, and some sources made note of the fact that the administration did not ask lawmakers to act but merely said "it may be appropriate" for Congress to consider raising the reserve level.

Other observers said the administration may only be suggesting that the current 1.5% cap be removed because it requires the FDIC to return funds to the industry.

Either interpretation made industry representatives nervous, though they conceded that the FDIC had been underfunded before the financial crisis.

"There is a sense that it would have been obviously better to have more money in the Deposit Insurance Fund before this crisis," said James Chessen, the chief economist for the American Bankers Association.

But Chessen warned against building the fund too high and said the White House appeared to be just trying to raise the reserve level to help offset the federal deficit.

"My fear is that" policymakers "would use this as just another tax on all banks," he said.

The industry would oppose raising the level to 1.5% and also objects to removing a cap on the FDIC's ability to charge premiums. "It's critically important that whatever range is discussed that there be some limitations on the FDIC's ability to raise more money," Chessen said.

Camden Fine, the chief executive of the Independent Community Bankers of America, warned that any attempt to increase the reserve fund would take money away from banks' lending potential.

"All it would do is negatively impact lending and the recovery," said Fine. "It would just further depress earnings of the banks during a time when banks are struggling to make earnings."

He argued that banks already pay enough in premiums — and are likely to pay high assessments for years to come.

"Right now the FDIC projects it will take eight years just to get back to 1.15%. That's paying 15 to 17 cents" per $100 of domestic deposits "on the assessment, which is a very high assessment historically," he said.

It is unclear where the FDIC will come down on the proposal. The agency supports removing the 1.5% cap but has not commented on whether reserves should be that high.

The FDIC's current system was the product of a sweeping reform bill passed in 2006, intended then to give the agency more leeway to build up reserves in good times.

Under current law, the FDIC must keep the reserve ratio between 1.15% and 1.50% and set an informal target within that range to guide its policy. (The current target is 1.25%). If the ratio exceeds 1.35%, the agency must begin issuing rebates to the industry.

The limits authorized in the 2006 legislation were seen at the time as an improvement on how the agency had previously set premiums.

Before this law, the FDIC had a hard target of 1.25%. If the reserve ratio fell below that level, steep premiums must be charged industrywide.

But as long as the ratio stayed above 1.25%, the FDIC was largely powerless to increase rates. During the decade through 2006, when the industry was largely stable, 95% of banks paid no premiums.

But even the revised system has been sharply criticized. By the time the bill passed, the FDIC had little time to build reserves before the financial crisis hit.

Once it did, the rapid pace of failures quickly drained the funds that had been collected. As of Sept. 30, the DIF had an $8.2 billion deficit.

Some observers said the administration's proposal recognizes that the FDIC perhaps should have been able to charge premiums during that time to prepare for a downturn and avoid the need to charge heavy premiums when banks are already facing formidable challenges.

"Have you ever heard of an insurance company telling someone: 'You're such a good driver that we're not going to require you to pay any insurance premiums for the year?' " said James Barth, a finance professor at Auburn University and a fellow at the Milken Institute.

Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., said she hoped the Obama proposal is a sign that the deposit insurance system will be revamped further.

"I hope it's an early indication that the FDIC will look at a more actuarially reasonable way to set the" designated reserve ratio, she said.

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